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A Comprehensive

Examination of

Purchasing Practices byIndustry

A Comprehensive

Examination of

Purchasing Practices byIndustry

Session FL

May 2, 2000


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PURCHASING AND SUPPLY MANAGEMENT

ANALYTIC OVERVIEW

PURCHASING AND SUPPLY MANAGEMENT

ANALYTIC OVERVIEW

Central IssueCentral Issue

Do purchasing best practices vary byindustry?

How can you use this information toimprove your own level of performance?

Do purchasing best practices vary byindustry?

How can you use this information toimprove your own level of performance?

AgendaAgenda

Brief methodologyReview of practices by industryAnalysis using PSM practices as drivers

How to assess your own performance

Brief methodologyReview of practices by industryAnalysis using PSM practices as drivers


Dr. Lisa Ellram C.P.M.,

Arizona State University

ASU Research Team Leader

Dr. Lisa Ellram C.P.M.,Dr. Lisa Ellram C.P.M.,

Arizona State UniversityArizona State University

ASU Research Team LeaderASU Research Team Leader

Dr. Sue Siferd,

Arizona State University

Co-researcher

Dr. Sue Siferd,Dr. Sue Siferd,

Arizona State UniversityArizona State University

CoCo--researcherresearcher

Michael Stanly C.P.M.,

McKinsey & Company

Research Sponsor

Michael Stanly C.P.M.,Michael Stanly C.P.M.,

McKinsey & CompanyMcKinsey & Company

Research SponsorResearch Sponsor


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There are differences among the level ofbest practices implementation by

industries

This information can be useful in assessingyour own performance and focusing future

improvement efforts

There are differences among the level ofbest practices implementation by

industries

This information can be useful in assessingyour own performance and focusing future

improvement efforts

THE END OF THE STORY FIRSTTHE END OF THE STORY FIRST


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Brief methodology

Review of practices by industry

Analysis using PSM practices as drivers


TODAYS DISCUSSIONTODAYS DISCUSSION


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Extensive review of the PSM literature Used existing/modified scales where

applicable Additional scales developed from the literature

and based on McKinsey PSM practices

Survey reviewed extensively by practitioners andacademics General business expertise Purchasing expertise Research expertise

Survey modified and pretested on severalpurchasing executives before finalized

APPROACH PSM SURVEY DEVELOPMENTAPPROACH PSM SURVEY DEVELOPMENT


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Received a database of 2,300 names from theNational Association of Purchasing Management

Members at director level or higher People who attended seminars/conferences

whose title was director level or higher

Database was refined to exclude governmental,consulting, colleges and universities, not-for-profit, legal and accounting firms, foreign firms,

and individuals who did not indicate the name of

their firm

A random sample of 1,000 was generated from theremaining database

APPROACH PSM SURVEY SAMPLE SELECTIONAPPROACH PSM SURVEY SAMPLE SELECTION


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APPROACH ACHIEVED A VERY FAVORABLE

RESPONSE RATE

APPROACH ACHIEVED A VERY FAVORABLE

RESPONSE RATE

Total surveys sent out

Refusals, returns, no

longer in function,

unusable, too late, blank

Effective number of

surveys considered

Usable surveys returned

Effective response rate

Total surveys sent out

Refusals, returns, no

longer in function,

unusable, too late, blank

Effective number of

surveys considered

Usable surveys returned

Effective response rate

26%26%responseresponse

raterate

1,000

76

924

246

1,000

76

924

246

Number of surveysNumber of surveys

199919991999

--

==

--:: ==26.6%26.6%26.6%

effective numbereffective number


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CH-ZXG734-008jsmMS

7

METHODOLOGYMETHODOLOGY

Treat each of the practices separately as a dependentvariable; Each of the other factors tested

simultaneously treated as a independent variable

Split the sample for the variable of interest into twogroups based on whether the observation lies above or

below the median score for that variable

Statistically compared responses of high versuslow involvement groups to determine the existence of

significant differences between the factors (e.g., does a

high involvement group look different than a low

performer on the other factors?)

Use regression analysis to determine which of thefactors are the true levers

Treat each of the practices separately as a dependentvariable; Each of the other factors tested

simultaneously treated as a independent variable

Split the sample for the variable of interest into twogroups based on whether the observation lies above or

below the median score for that variable

Statistically compared responses of high versuslow involvement groups to determine the existence of

significant differences between the factors (e.g., does a

high involvement group look different than a low

performer on the other factors?)

Use regression analysis to determine which of thefactors are the true levers


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EnergyEnergy

High techHigh tech

1999 STUDY SUMMARY BY INDUSTRY1999 STUDY SUMMARY BY INDUSTRY

Total number of

respondents

Total number ofTotal number of

respondentsrespondents

By industry groupBy industry groupBy industry group

4848

246246

8585

ManufacturingManufacturing ServiceService

6565

21211919

Health careHealth care

88

UnclassifiableUnclassifiable


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Brief methodology






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UNDERLYING PREMISE THERE ARE A SET OF

BEST PRACTICES IN PSM THAT LEADING-EDGE

FIRMS FOLLOW

UNDERLYING PREMISE THERE ARE A SET OF

BEST PRACTICES IN PSM THAT LEADING-EDGE

FIRMS FOLLOW

Set of best practices was developed basedon extensive consulting work

A review of the literature

Expert opinion

We call these characteristics of world-classPSM

Set of best practices was developed basedon extensive consulting work

A review of the literature

Expert opinion

We call these characteristics of world-classPSM


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Traditional purchasing organization

High

aspirations

High

aspirations

Periodic, incremental purchase price

reductions, hoping to keep up with inflation

Source: McKinsey Purchasing and Supply Management Practice

Disadvantaged vs. suppliers in

negotiations who have better facts aboutthe buy

Process orders and minimize the cost of

the purchasing function

Purchasing viewed as an administrative

function and staffed with mediocre

performers; last to know about key

decisions

Infrequent bidding with some;undemanding partnerships with too many

World-class supply management organization

Captures 10-15% initial reduction in total cost of

ownership, followed by 3-5% ongoing annual

improvements

Advantaged vs. suppliers, with distinctive insights in 3

areas Total cost of ownership (TCO) Supplier economics Supply market options and opportunities

Strategic rather than tactical focus; develops and executes

sourcing strategies grounded in a thorough understanding

of supply market and deliver significant and sustainablereductions in TCO

Staffed with the best and brightest and a respected

member of teams formed around core processes such as

compliance management

Builds a world-class supplier network with a fewdemanding partnerships for the goods and services that

can truly contribute to competitive advantage

Attribute

Advantagedfact base

Advantaged

fact base

Strategic

focus

Strategic

focus

Supplier

network

Supplier

network

Current

technology

Current

technology

Technology tools rarely applied; when so,

focus on reducing transaction cost and

tracking compliance

Strategic application of supply management technology tools

to accelerate journey to world-class through

Preemptively reshaping supply markets to their advantage

Harnessing more knowledge for better decision making onTCO, supplier economics, and supply markets

Better integrating suppliers

6 ATTRIBUTES OF WORLD-CLASS PSM

Top talentTop talent


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Traditional purchasing organization

High

aspirations

High

aspirations


reductions, hoping to keep up with

inflation









decisions


World-class supply management organization



improvements


areas Total cost of ownership (TCO) Supplier economics Supply market options and opportunities









Attribute

Advantagedfact base

Advantaged

fact base

Strategic

focus

Strategic

focus

Supplier

network

Supplier

network

Current

technology

Current

technology



tracking compliance









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WORLD-CLASS SUPPLY MANAGEMENT

CHARACTERISTICS HIGH ASPIRATIONS/

ACCOUNTABILITY


CHARACTERISTICS HIGH ASPIRATIONS/

ACCOUNTABILITY

100

Very high

0

None

87.187.1

ManufacturingManufacturing

85.585.5

ServiceService

89.089.0

High techHigh tech

EnergyEnergy

87.787.7

90.990.9

HealthcareHealthcare

Purchasers areincreasingly held

accountable for

resultsNo real differenceexists among

industries

Purchasers areincreasingly held

accountable for

resultsNo real differenceexists among

industries


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High

aspirations

High

aspirations





negotiations who have better facts

about the buy






decisions

Infrequent bidding with some;

undemanding partnerships with too many



improvements

Advantaged vs. suppliers, with distinctive insights in

3 areas

Total cost of ownership (TCO) Supplier economics Supply market options and opportunities



of supply market and deliver significant and sustainable

reductions in TCO




Builds a world-class supplier network with a few

demanding partnerships for the goods and services thatcan truly contribute to competitive advantage

Advantaged

fact base

Advantaged

fact base

Strategic

focus

Strategic

focus

SuppliernetworkSuppliernetwork

Current

technology

Current

technology



tracking compliance



Preemptively reshaping supply markets to their advantage Harnessing more knowledge for better decision making on

TCO, supplier economics, and supply markets Better integrating suppliers



Traditional purchasing organization World-class supply management organizationAttribute


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CHARACTERISTICS


CHARACTERISTICS

No real differenceamong industries

all are high

This is aprerequisite, not

a differentiator

No real differenceamong industries

all are high

This is aprerequisite, not

a differentiator

100Always

0Never

88.188.1


86.786.7

ServiceService

86.886.8

High techHigh tech

EnergyEnergy

81.181.1

86.086.0


Advantaged fact based

market knowledge


market knowledge

Stay in close touch with the external supply marketeconomic trends, technology, availability, pricing


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CHARACTERISTICS


CHARACTERISTICS

100

Always

0

Never

73.673.6


71.571.5

ServiceService

74.074.0

High techHigh tech

EnergyEnergy

72.472.4

71.871.8



use of TCO for key

purchases


use of TCO for key

purchases

Use TCO analysis

Less prevalentthan market

knowledgeStill nosignificant

differences


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CHARACTERISTICS


CHARACTERISTICS

Lessprevalent

than TCO

Nosignificant

differences...

Lessprevalent

than TCO

Nosignificant

differences...

100

Always

0

Never

67.667.6


68.268.2

ServiceService

69.969.9

High techHigh tech

EnergyEnergy

63.763.7

73.673.6



strategic cost management


strategic cost management

Use other strategic cost management approachesUse other strategic cost management approaches


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CHARACTERISTICS


CHARACTERISTICS

Some largedifferences related todeveloping target

costs for purchases,

and for sharing those

targets with

customers

Not surprisingly,manufacturing, high

tech, and healthcare

lead, showing theemphasis on specific

goals for cost in those

industries

Overall, use of facts is

important in allindustries

Some large

differences related todeveloping target

costs for purchases,

and for sharing those

targets with

customers

Not surprisingly,manufacturing, high

tech, and healthcare

lead, showing the

emphasis on specific

goals for cost in those

industries

Overall, use of facts is

important in allindustries

100Always

0Never

65.265.2


54.654.6

ServiceService

67.267.2

High techHigh tech

EnergyEnergy

46.846.8

60.560.5



use of target costing


use of target costing

Use target costing


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High

aspirations

High

aspirations











decisions




improvements


areasTotal cost of ownership (TCO)

Supplier economics

Supply market options and opportunities

Strategic rather than tactical focus; develops and

executes sourcing strategies grounded in a thorough

understanding of supply market and deliversignificant and sustainable reductions in TCO






Advantagedfact base

Advantaged

fact base

Strategic

focus

Strategic

focus

Supplier

network

Supplier

network

Current

technology

Current

technology



tracking compliance










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CHARACTERISTICS


CHARACTERISTICS100

Always0

Never

86.186.1


85.785.7

ServiceService

84.984.9

High techHigh tech

EnergyEnergy

85.685.6

89.589.5


Strategic focusStrategic focus

Virtually no

difference among

industries All show a high

focus on strategy

development for

key purchases

Virtually no

difference among

industries All show a high

focus on strategy

development for

key purchases

Develop/execute strategies for key purchases


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High

aspirations

High

aspirations











decisions




improvements



Supplier economics






member of teams formed around core processes such

as compliance management



Advantagedfact base

Advantaged

fact base

Strategic

focus

Strategic

focus

Supplier

network

Supplier

network

Current

technology

Current

technology



tracking compliance










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CHARACTERISTICS


CHARACTERISTICS

Not surprisingly,manufacturing

and high tech

come out on top

Greater emphasison PSM for years

Energy sectorneeds to play

catch-up

Not surprisingly,manufacturing

and high tech

come out on top

Greater emphasison PSM for years

Energy sectorneeds to play

catch-up

100Very high

0Very low

50Average

73.073.0


69.069.0

ServiceService

73.473.4

High techHigh tech

EnergyEnergy

61.561.5

71.671.6


Top talent/perception

of PSM

Top talent/perception

of PSM

Measured by high reporting level, job rotation, perceived importance

by top management, other functions

S O O C SS S


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High

aspirations

High

aspirations











decisions

Infrequent bidding with some;undemanding partnerships with too

many



improvements



Supplier economics








Builds a world-class supplier network with a fewdemanding partnerships for the goods and services

that can truly contribute to competitive advantage

Advantagedfact base

Advantaged

fact base

Strategic

focus

Strategic

focus

Supplier

network

Supplier

network

Current

technology

Current

technology



tracking compliance










25/33

SUPPLIER NETWORKS STRATEGIC ALLIANCESSUPPLIER NETWORKS STRATEGIC ALLIANCES

100

Very high

0

None

83.183.1


81.181.1

ServiceService

83.783.7

High techHigh tech

EnergyEnergy

78.978.9

83.083.0


All very similarin their

recognition of

the importanceof supplier

relations/

networks

All very similarin their

recognition of

the importanceof supplier

relations/

networks


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SUPPLIER NETWORKS

SUPPLIER CO-LOCATION

SUPPLIER NETWORKS

SUPPLIER CO-LOCATION

100

Frequently

0

Never

48.748.7


51.251.2

ServiceService

59.359.3

High techHigh tech

EnergyEnergy

50.050.0

58.558.5


Surprisinglylowest in

manufacturing

firms, but

fairly lowoverall

Great deal oftalk versus

real level ofactivity

Surprisinglylowest in

manufacturing

firms, but

fairly lowoverall

Great deal oftalk versus

real level ofactivity

S O O C SS S


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High

aspirations

High

aspirations


reductions, hoping to keep up with

inflation


negotiations who have better factsabout the buy






decisions

Infrequent bidding with some;undemanding partnerships with too

many



improvements

Advantaged vs. suppliers, with distinctive insights in

3 areasTotal cost of ownership (TCO)

Supplier economics


Strategic rather than tactical focus; develops and

executes sourcing strategies grounded in a thorough

understanding of supply market and deliver

significant and sustainable reductions in TCO


member of teams formed around core processes such

as product development

Builds a world-class supplier network with a fewdemanding partnerships for the goods and services

that can truly contribute to competitive advantage

Advantaged

fact base

Advantaged

fact base

Strategic

focus

Strategic

focus

Supplier

network

Supplier

network

Current

technology

Current

technology

Technology tools rarely applied; when

so, focus on reducing transaction cost

and tracking compliance

Strategic application of supply management technology

tools to accelerate journey to world-class through

Preemptively reshaping supply markets to their

advantage Harnessing more knowledge for better decision making

on TCO, supplier economics, and supply markets






28/33


CHARACTERISTICS USE OF TECHNOLOGY


CHARACTERISTICS USE OF TECHNOLOGY

100

Very high

0

None

66.166.1


64.864.8

ServiceService

75.275.2

High techHigh tech

EnergyEnergy

65.965.9

75.175.1


Healthcare

and high tech

firms lead the

way

- EDI- e-Ordering

- Faster move-

ment to

e-Procurement

Healthcare

and high tech

firms lead the

way

- EDI- e-Ordering

- Faster move-

ment to

e-Procurement


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Brief methodology






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Overall, high tech leads the way COPY THEM!

Energy lags

NEED TO CATCH UP!

Overall, high tech leads the way COPY THEM!

Energy lags

NEED TO CATCH UP!

BIGGEST SURPRISE HOW FEW DIFFERENCES

THERE REALLY ARE BY INDUSTRY!

BIGGEST SURPRISE HOW FEW DIFFERENCES

THERE REALLY ARE BY INDUSTRY!

Given the low incidence of significant differences

in world-class purchasing practices, whats the

best approach?

Given the low incidence of significant differences

in world-class purchasing practices, whats the

best approach?


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WHAT CHARACTERIZES THE

BEST OF THE BEST ACROSS INDUSTRIES?

WHAT CHARACTERIZES THE

BEST OF THE BEST ACROSS INDUSTRIES?

Strategic alliances in supplier networks and highaspirations for results appear as the most

frequent levers

Do these first if you want to improve overall

These are followed in frequency by fact-based

strategic cost management and target costing,and a strategic focus

The next area to target if you are already good

at alliances/high aspirations

Strategic alliances in supplier networks and highaspirations for results appear as the most

frequent levers

Do these first if you want to improve overall

These are followed in frequency by fact-based

strategic cost management and target costing,and a strategic focus

The next area to target if you are already good

at alliances/high aspirations

O S


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OVERALL SUMMARYOVERALL SUMMARY

The levers identified can be used to facilitateimprovement in a particular attribute

It is difficult, and often not meaningful, to isolatesingle causes of superior PSM performance

PSM is a system

Attributes of world class PSM organizations arehighly related

The analysis of the key levers shows that certaintypes of behaviors are likely to drive, or at least

be supportive of, other PSM practices within the

researched attributes

The levers identified can be used to facilitateimprovement in a particular attribute

It is difficult, and often not meaningful, to isolatesingle causes of superior PSM performance

PSM is a system

Attributes of world class PSM organizations arehighly related

The analysis of the key levers shows that certaintypes of behaviors are likely to drive, or at least

be supportive of, other PSM practices within the

researched attributes


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A Comprehensive

Examination ofPurchasing Practices by

Industry

A Comprehensive

Examination ofPurchasing Practices by

Industry

Session FL

QuestionsDiscussion

Wrap-up

Documents

A Comprehensive Seen 19.11.10